Q: Hello Sven. I feel like I know you through your three part series in the Journal of Business Compliance, and our soon to be published roundtable. So, could you tell us a little about today’s Q and A? [1]
Richard, thanks for the opportunity to talk with you about a topic that is very important to me. After having spent around 10 years for a major consulting company in the areas of financial performance management, risk management and compliance, I felt the need to understand a bit better of what actually drives business behavior when it comes to compliance, and specifically anti-corruption. I have seen too many clients and colleagues struggling to “sell” an anti-corruption program in their own company to senior management.
Are companies getting active because they are required to by law? Are they doing this because it is the right thing to do? Or does it actually make good business sense? So I was rather fortunate to spend the last 3,5 years working for a Governance School in Germany, researching and testing a combined approach of punishments (sanctions) and rewards (incentives), often referred to as ‘carrots and sticks’.
Q: Can you share some of your lessons learned from this experience?
The question of what appears to be the most effective way of making companies adhere to anti-corruption standards (e.g. law, code of conduct for suppliers) typically triggers the following reaction: companies and their representatives that behave wrong must be punished. But is this really the best approach?
There are more than 170 countries that signed up to the United Nations Convention against Corruption (UNCAC); and I am happy to say this list includes now also my own country, Germany. But there were already companies out there that conducted business in an ethical way – based on principles of accountability, transparency, and integrity – even before the enactment of such conventions. And it is probably fair to say that another large portion of the business sector understood the relevance of investing in effective anti-corruption ethics & compliance programs after witnessing high-profile cases, where companies were fined billions of dollars and executives were sent to jail.
Q: So where do things stand now? Lets call it a global “snapshot.”
We need to ask ourselves the question: despite an increased awareness among companies of the negative social, economic, commercial and moral consequences of corruption, why are we still seeing so many cases of companies and their representatives engaging in corrupt acts?
I would say there are three practical arguments that may answer this question:
Companies are not afraid of getting caught: Companies do not fear negative consequences for being corrupt because they simply don’t get caught.
Companies are not afraid of getting punished: Even when companies get caught, the consequences (e.g. legal and regulatory fines) are not dissuasive enough, so being corrupt is still perceived as more profitable.
There is no real business alternative to corruption (in the short term): Even if companies are afraid of getting caught and fear negative consequences, they may see no other way of surviving in a competitive environment.
Let’s be hypothetical for a moment. Under conditions of perfect enforcement, dissuasive sanctions would increase the costs of corruption so substantially that they would be enough to convince companies not to engage in illicit acts. In other words, corruption becomes too much of a risk and is therefore seen as unprofitable. However, perfect enforcement conditions rarely exist and sanctions are very often neither applied nor dissuasive enough.
That means, one way – let’s call it the traditional way – of motivating business to counter corruption is to work on increasing the “fear factor”. Strengthening law enforcement, cooperation between national and international authorities and the protection (and rewarding) of whistleblowers are among frequent discussed topics. But these typically take time – and political will.
Q: But wait, isn’t that what is happening now? There is a lot of talk about more enforcement, greater international cooperation, etc? What about the continued stream of enforcement actions, now taking place not only in the US, but also in the UK, Germany and, Canada?
Indeed, we have seen a significant increase in law enforcement over the last years. And that is very positive; but there is still much that needs to be done. For example, the latest Transparency International report on enforcement of the OECD’s Anti-Bribery Convention [2] shows that “in half of the [OECD] countries there is little or no enforcement against foreign bribery”. Thus, we are still seeing a lot of environments where the threat of punishment exists only ‘on paper’, the situation ‘in practice’ looks much different.
So we need to work on this. But in the meantime, does that mean that in zones of weak governance there is nothing that can be done to get business’ attention? And even in environments with strong law enforcement, is the common approach of penalizing corrupt business really sufficient? I would argue that the answer to both questions is ‘No!’.
Q: Ok, so if sanctions are not working, what are the alternatives?
The reason why companies are in business is because they want to engage in profitable transactions. So we should use this raison d’être as a complementary approach in the fight against corruption, by offering incentives to companies that demonstrate good performance. If the commitment to counter corruption is linked to tangible business advantages, the likelihood is much greater that companies will actually make that commitment. Countering corruption is then not only seen as a way to avoid negative consequences, but as a way for companies to set themselves apart from their peers (and gain competitive advantage). This offers an alternative approach for companies that currently feel refraining from corruption translates directly into a loss for the business.
However, research has shown that such a complementary “incentive approach”, to date, is often underestimated or even unknown to those seeking to advance anti-corruption.
Q: Sven, with all due respect, this sounds quite utopian!
[Laughs] You are right; we are far away from mainstream. This has also been shown by our research. While our expert survey in 2012 showed that 92% of respondents agreed that preferential treatment should be applied to companies that demonstrate adherence to anti-corruption principles, it is still challenging to find such examples. But they are there and increasing by numbers. A remarkable and inspiring example can be found in a country that is seldom making positive headlines in the fight against corruption: Nigeria.
A Corporate Governance Rating System in Nigeria has been established, seeking to leverage the financial markets for advancing good governance and anti-corruption practices. How? By providing business advantages for companies listed at the Nigerian Stock Exchange (NSE) [3]. This flagship rating system was recently introduced to various market players including domestic and international investors, listed companies, international organizations and the general public. According to the Chief Executive Officer of the NSE, Mr. Oscar Onyema: “It is expected that companies will enjoy tangible business advantages from risk-oriented and/or ethically sensitive business partners and investors. In addition, competitors would be challenged to establish the same level of good governance by setting standards of excellence. Companies would not only set themselves apart from their peers, but also contribute to improving the climate for doing business in Nigeria.”[4]
This statement sums it up nicely: Providing tangible business advantages to companies which demonstrate ethical leadership
motivates even those companies which so far have not seen any value in countering corruption.
Q: Ok, that sounds nice, but having been to Nigeria, and having my credit card credentials stolen by the hotel, and twice overcharged on domestic flights, I am skeptical. So, would you mind giving us a few examples of how these incentives are actually applied, and what benefits a company enjoys when they rank well?
Companies can enjoy commercial advantages by attracting risk-averse or socially responsible business partners – both on a national and international level. This is especially important, as doing business in Nigeria is perceived as a high-risk venture due to the country’s high level of corruption. Nigerian companies that can demonstrate good governance practices can set themselves apart from their local peers and become much more attractive to inventors or international companies seeking local business partners [5]. The attention that this rating system has already gained in the business community in Nigeria and beyond already demonstrates that companies understand the benefits of being associated with such a system – and what it means if they don’t make the cut.
But there is no easy way of getting those benefits. Companies need to achieve a very ambitious score of 70% or higher in the ratings process. The process looks at a company’s Corporate Compliance, Fiduciary Awareness and Corporate Integrity, combining quantitative with qualitative assessment, so this is not just another ‘check the box’ approach. Also, the rating system has a more diverse and in-depth information base compared with other existing corporate governance ratings / indices. And finally, the rating process is very transparent, supervised by a multi-stakeholder governance board.
Because it is very clear, stakeholders will grant such incentives to companies only on solid and justified grounds.
Q: So, any parting thoughts?
Obviously, such genuine incentives are not a substitute for sanctions. But in addition to sanctions stakeholders need to start offering genuine incentives to business. The public sector could reward companies with granting public advantages, including public subsidies, licenses, public procurement contracts, contracts funded by official development assistance, and officially supported export credits [6] . Within the business sector, companies could motivate their business partners by offering incentives such as (but not limited to) preferred supplier status, assistance for capacity building, favorable payment conditions. And civil society organizations can publicly praise companies for outstanding performance.
There is much that can be done – and well, if it is taking hold in Nigeria, imagine the possibilities!
Sven Biermann is the former Director of Anti-Corruption Projects at the HUMBOLDT-VIADRINA School of Governance in Berlin/Germany and a recognized though leader, author and anti-corruption coach for business sector-related integrity measures. The author can be contacted at sven.biermann@mail.de
[1] Extracts taken from HUMBOLDT-VIADRINA School of Governance, Motivating Business to Counter Corruption – A Practitioner Handbook on Anti-Corruption Incentives and Sanctions, 2013 (see also http://www.youtube.com/watch?v=J71Rd7i0HvQ)[2] http://www.transparency.org/whatwedo/publication/exporting_corruption_country_enforcement_of_the_oecd_anti_bribery_convention[4] http://www.nse.com.ng/mediacenter/pressreleases/Pages/NSE-CBi-Launch-Corporate-Governance-Rating-System.aspx[6] As shown e.g. in the 2009 recommendations of the OECD Council for Further Combating Bribery of Foreign Public Officials in International Business Transactions, Article X.C.vi.
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